Bahrain losing its edge as finance hub

Last updated: 03 April, 2011

Sara Hamdan, The New York Times

The protests in Bahrain, and their brutal repression, have raised major questions over its future as a regional financial hub, analysts say, with banks acting to relocate employees and capital to elsewhere in the region in case conditions worsen despite the declaration of a three-month state of emergency.

Men walked near the Bahrain Financial Harbor in the captial, Manama. The recent unrest has forced banks to relocate some employees, calling into question the country’s status as a regional financial hub. “Bahrain has suffered irreparable damage to its reputation as a financial hub, one that will take a long time to repair,” said Ayesha Sabavala, a Middle East economist at the Economist Intelligence Unit, based in London. “Before this, its position was already challenged by business centers in Dubai, Doha and Abu Dhabi anyway.”

Now, she said, the protests and unrest have persuaded banks to start transferring assets and employees to places perceived as safer. Bahrain’s financial center is one of the oldest in the region, established in the early 1980s as part of an economic diversification plan away from oil dependency.

Although losing a bit of an edge to competition from newer financial centers in Dubai, Abu Dhabi and Doha in the past decade, the kingdom remained a hub for offshore banking and Islamic financial services.

But its status was challenged a new when protests began in late February. Conditions worsened and a three-month state of emergency was declared on March 15, with troops from Qatar, the United Arab Emirates and Saudi Arabia sent to control Shiite protesters at the request of Bahrain’s government. Now, a month after the kingdom’s crisis started, businesses have begun seeking backup facilities in surrounding countries, banking analysts say.

“Banks are starting off with expatriate staff, moving them from Bahrain offices to Dubai and Doha, particularly offshore banks that already have offices in other countries,” Sabavala said. “There is talk of completely relocating by many of them; the fact that there are similar financial hubs so close to Bahrain means companies don’t have to think too hard about relocating. The infrastructure and similar business environment make the change easy for them.”

A spokesman for HSBC’s Middle East operations said the bank had robust contingency plans in place for crisis situations, designed to keep critical services, including cash machines and call centers, functioning in times of disruption. “HSBC’s first consideration is for the safety and security of its staff,” the spokesman in an e-mail.

“While no staff were evacuated, HSBC will continue to closely monitor events in Bahrain, taking all necessary steps to protect its staff, customers and their interests.” Analysts have also begun noticing a flow of capital as banks transfer some assets to neighboring countries.

“The Central Bank of Bahrain is expected to release statistics early in April, which will indicate the impact of the unrest on banking activity, and in particular on the liquidity available to banks,” said Sofia El Boury, an analyst at Shuaa Capital in Dubai. “What we’ve seen so far, in general, is a money flow to places like Dubai and other cities where banks can operate in a safer political environment.”

So far, banks have mostly taken short-term measures to protect their operations and assets, but if uncertainty continues, without signs of a political resolution, relocations could be permanent, analysts said.

“With this scenario, it is possible that regional businesses will look for an alternative financial center,” said Raj Madha, banking analyst at Rasmala Investments in Dubai. “It is clear that Bahrain’s reputation as a stable, business-friendly place has taken a major hit, and that might shift the balance in favor of places like Dubai.”

Standard & Poor’s downgraded Bahrain’s credit rating three times after the onset of political tensions, ultimately to BBB, one notch above junk status.

That was complemented by downgrades of Bahraini banks and insurance companies: Ahli United Bank, BMI Bank, the Bahraini branch of Arab Bank, Bahrain National Insurance Co., and Arab Banking Group, which is based in Bahrain but majority-owned by the Libyan government. All of these companies were placed on credit watch with negative implications. S.&P. states that the medium-term outlook for the economic and operating environment for Bahraini banks has weakened, which could have negative implications on their creditworthiness. The rating agency believes the business and funding profiles of Bahraini banks are exposed to the current turmoil.

With oil prices touching highs of up to $115 a barrel and the considerable oil revenue for the government, the local market still has a cushion despite uncertainty. As† 80 per cent of government revenue in Bahrain comes from oil and† gas.

“In that sense, the domestic companies operating in Bahrain and relying mainly on the local market won’t be as severely impacted as those using Bahrain as an offshore hub, or taking deposits from outside the market,” said Sabavala, the Economist Intelligence Unit economist. “The rise in oil prices means that the government has the capability to pump money into the economy when needed, particularly to support the local market.”

Support for financial services in Bahrain will be crucial in the coming months. The financial sector makes up 25 per cent of the kingdom’s gross domestic product, and assets in the banking sector are roughly equivalent to 10 times Bahrain’s gross domestic product, said Philipe Dauba-Pantanacce, a senior economist at Standard Chartered Bank covering the Middle East and North Africa region.

“Bahrain will also continue to benefit from close relations with Saudi Arabia, as well as any longstanding stable regulatory framework — this hasn’t changed,” Madha said. The current situation, however, “tips the case towards Dubai, especially for businesses set to launch operations in the region for the first time,” he said.

What the unrest has done is strengthen the case for Dubai and Doha as commercial hubs in the region, although this is one factor among many, including regulatory, commercial and legal stability.

“It would be unfair to say that Bahrain is dead as a financial hub, but it will suffer long-term reputational damage,” Sabavala said. But if conditions worsen, we will definitely see relocations.”